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2017 (1) TMI 614 - ITAT MUMBAI

2017 (1) TMI 614 - ITAT MUMBAI - TMI - Addition made on account of claim of reduction in value of investment as business loss which was stock-in-trade - Held that:- We find from the above facts that the assessee held these securities as current investments as stock-in-trade and, therefore, provisions made for depreciation in the value of securities as allowable as deduction and this supports by the following facts:- - i) Securities are purchased and sold in the course of carrying on business .....

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market value. - iv) Such valuation of closing stock of securities is as per section 145 and 145A of the Act. - In view of the above facts and circumstances, we are of the view that the allowability of deduction u/s 37(1) of the Act and deduction for the provisions for depreciation the assessee is entitled to. Thus we confirm the order of the CIT (A) deleting the addition made by the AO and dismiss the appeal of the Revenue - Decided in favour of assessee - Disallowance of expenses r .....

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8D of the Rules. - Decided in favour of assessee - Disallowance of tds credit - Held that:- The assessee fairly stated that he is ready to produce evidences before AO and AO may be directed to verify the same and allow credit for TDS. We find no reason not to direct the AO accordingly. Hence, we direct the AO to verify the evidences regarding credit for TDS and accordingly allow the same. - Charge interest u/s 234C on returned income as against interest charged on the assessed income - H .....

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nue and CO (161/Mum/2014) by Assessee is arising out of the order of the CIT (A)-12, Mumbai in appeal No. CIT(A)-12/ACIT-6(2)22/11-12 dated 26-02-2013. Other appeal by assessee (ITA No.1276/Mum/2015) is against the order of the CIT(A)-12, Mumbai in appeal No.CIT(A)-12/DCIT.6(2)/IT-2/2013-14 dated 08-12-2014. Assessments were framed by the ACIT, Range- 6(2), Mumbai for the assessment year 2008-09 vide his order dated 15-12-2011 and for assessment year 2009-10 by the DCIT-6(2), Mumbai vide his ord .....

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uss the facts of revenue s appeal and decide the issue. For this, the Revenue has raised the following 5 grounds:- 1. On the facts and circumstances of the case ad in law, the Ld. CIT(A) erred in deleting the addition of ₹ 62,00,000/- and treating the reduction in value of investment as business loss when the entire investment could not be treated as stock-in-trade. 2. On the facts and circumstances of the case and in law, the Ld. CIT(A)(A) erred in failing to appreciate that the assessee .....

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y the assessee I showing the closing stock of these securities at marked to market value as the end of the financial year, even when such accounting was not in consonance with the RBI guidelines. 4. On the facts and circumstances of the case ad in law, the Ld. CIT(A) erred in failing to appreciate that the assessee company being a NBFC and regulated by the RBI is bound to divide investment as current investments and long term investment on the lines of investment by the Banks as Held For Maturit .....

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business loss to the current investment and allowing the reduction in value of investment for the long term investment to be shown only at book value at the end of the financial year as business loss which actually being only a notional loss is not a deductible expenditure . 3. Briefly stated facts are that the assessee is a Non Banking Financial Company (NBFC) following mercantile system of accounting. The AO on going through the profit & loss account noticed that the assessee has debited p .....

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on in the profit & loss account and thus, the expenses are not actually incurred or crystallized by the assessee and the only provisions has been made for such expenses. Accordingly, he disallowed the provisions for depreciation on investments amounting to ₹ 62 lacs. Aggrieved, the assessee preferred appeal before the CIT(A), who allowed the claim of the assessee by observing in Para 4.4 and 4.5 of his order as under:- 4.4 I have carefully considered the order of the AO and the submiss .....

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has also not been held as incorrect by the AO. The only issue disputed as the claim of the appellant as made in the P & L A/c. regarding provision for depreciation on investment. This has been done as the appellant values current investment at cost or market value whichever is lower and either credit or debited the gain or loss. The loss is debited under the nomenclature provision, but it is actual valuation loss. The AO has rejected this claim of the appellant for the reasons as reproduced .....

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usiness in the year. The AO has also not considered the fact that the valuation of closing stock of securities has been carried on as per the mercantile / actual system of accounting regularly employed by the appellant and the method so employed by the appellant is duly supported by the RBI norms read with AS-13 of the Institute of Chartered Accountants. It is also seen that the appellant has taken into consideration provisions of section 145 and 145A of the IT Act in valuing the closing stock o .....

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re to be valued at actual cost initially recognized or net realizable value at the end of the previous year, whichever is lower. If there is a negative difference that results on account of such valuation the same is to be treated as a loss in the accounting done. It would be immaterial as to the nomenclature that is given to such quantum that is arrived at. All that would need to be seen that it is not a provision but the actual loss that is debited to the P & L Account. In this case, it is .....

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ng in shares. The order of the AO, it is seen, is silent on the fact as to why he has considered that the claim has not actually crystallizing and that it is only provisions made that stands debited. The action of the AO in rejecting a claim made by the appellant on the basis of a suspicion without specifically establishing the fact as to why the same was not acceptable cannot be upheld. This especially so if the appellant has been able to establish that it has followed the provisions of Income .....

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seen that the appellant has maintained details of stock in trade and has made available its valuation to the AO. The AO has not pointed out any defect noticed that would show that the stock in trade has not been valued properly to disclose the correct income. From the details available, it is clear that the appellant was maintaining its account on the Mercantile system. It is seen the valuation of stock in trade has been done by the appellant on the basis of cost price or market price whichever .....

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Gujarat State Investment Ltd. v/s. DCIT (2002) 74 TTJ (Ahd-Tribunal) supports stand taken by the appellant. It is also seen that the appellant‟s case is directly covered by the judgment of the Hon‟ble Kolkata Tribunal in the case of ACIT v/s. Dalhousie Investment Trust Co. Ltd. (2002) 80 ITD 210, wherein the Hon‟ble Tribunal has held that the method of valuation of closing stock on the basis of cost or market value whichever is lower is a well established Rule of commercial pra .....

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ture provision for depreciation. The addition made is, therefore, deleted and the ground of appeal allowed . Aggrieved, now the Revenue is in appeal before the Tribunal. 4. We have heard the rival contentions and gone through the facts and circumstances of the case. We find from the facts of the case that the assessee is a registered NBFC under the Reserve Bank of India Act, 1934. The assessee is following mercantile system of accounting. During the previous year 2007-08 relevant to this assessm .....

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urities, certificate of deposits and commercial papers and Corporate Bonds. The assessee valued these investments at cost or market value whichever is lower and the same is provided depreciation amounting to ₹ 62 lacs on account of fall in market value of the investments. This valuation is done in accordance with the prudential norms prescribed under the RBI Act. The assessee before us submitted the details of securities held by them and constituted stock-in-trade. The learned Counsel for .....

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0 9,91,120 2009 It was claimed by the assessee that these securities were sold in the next year or in the year thereafter and have not been held as long term. 5. We find from the above facts that the assessee held these securities as current investments as stock-in-trade and, therefore, provisions made for depreciation in the value of securities as allowable as deduction and this supports by the following facts:- i) Securities are purchased and sold in the course of carrying on business of the a .....

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ch valuation of closing stock of securities is as per section 145 and 145A of the Act. In view of the above facts and circumstances, we are of the view that the allowability of deduction u/s 37(1) of the Act and deduction for the provisions for depreciation the assessee is entitled to. This view of ours is supported by the decision of the Hon ble Supreme Court in the case of United Commercial Bank Ltd. Vs CIT (1999) 241 ITR 355 (SC) and the decision of the Hon ble Bombay High Court in the case o .....

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ed March 19, 1985. However, the Commissioner of Income-tax intervened by order dated March 9, 1987, under Section 263 of the Income-tax Act. By the said order, the Commissioner set aside the order of assessment holding that the assessee-bank had no right to calculate profit or loss arising out of the investment trading account as the said account did not form part of the final account of the assessee-bank. That, since the investment trading account was not incorporated in the final account, the .....

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wing for the last 30 years. Consequently, the order passed by the Commissioner under Section 263 was set aside. Against the said order of the Tribunal, two questions were referred for opinion to the High Court. Answering the said questions, the High Court observed that the assessee-bank had not valued the stock of shares and securities in its books of account in accordance with the method of "cost or market price whichever is lower ; if this method was not followed in preparing the investme .....

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times. Consequently, the matter came before the Supreme Court. The apex court came to the conclusion that preparation of balance-sheet by the assessee-bank was governed by the Banking Regulation Act, 1949. That, under the Third Schedule to that Act, the balance-sheet and profit and loss account have been prescribed. That, in the prescribed form, there is a column "property and assets". Item 4 provides for investments (mode of valuation, i.e., cost or market value). Note (f) in column 4 .....

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k did not mention the market value of the investments. In the circumstances, the Supreme Court came to the conclusion that from the form of the prescribed balance-sheet, it was evident that the nationalized banks were directed to put the value of shares and securities at cost and if the market value was lower than the cost then, it was to be shown separately in brackets. Before the Supreme Court, however, it was argued on behalf of the Department that the balance-sheet/audited accounts maintaine .....

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price was required to be taken into account. That, for the last 30 years, the assessee-bank was submitting income-tax returns after taking into account the market price of such shares and securities which was accepted by the Department. It was submitted that not making proper entries in the balance-sheet could hardly be a ground for not assessing the real income. The Supreme Court came to the conclusion on the above arguments that where the market value of shares and securities had fallen below .....

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were required to be maintained in the statutory form. However, such entries in the balance-sheet were not decisive or conclusive. In such cases, it was open to the Income-tax Officer and the assessee to ascertain the true and proper income while submitting the income-tax returns. That, for valuing the closing stock, it was open to the assessee to value the stock at cost or market price whichever is lower. That, the assessee was valuing the stock-in-trade at cost for the purposes of statutory ba .....

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ooting because in the case of United Commercial Bank, the loss was not debited to the profit and loss account whereas in this case, as can be seen from the working at pages 25 and 26 of the paper-book, the loss of ₹ 11,82,35,007 has been debited to the profit and loss account which is reflected as a provision for liability in the balance-sheet and the shares and securities were valued at cost on the assets side. 6. Further, as reliance placed by Ld. Counsel for the assessee on the order of .....

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us nor prejudicial to the interest of revenue. The reasons for coming to this conclusion area as under: (i) As regards, the contention in the show cause notice that RBI being regulator of NBFCs (for assessee also RBI is the regulator, as it is a BBFC) for the assessee and AO did not verify whether the assessee has compiled with the Guidelines issued by RBI or not. The issue is not whether violation of Guidelines was observed by the undersigned or not but the basic fact remains that A.O. did not .....

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dicial to the interest of revenue on this point. I also accept the argument of the assessee that it was granted license/regulator of NBFC without any permission to invite public deposits. The assessee company was therefore not required to maintain certain securities in the form of SLR and has therefore correctly considered all the investments as current investment and treated them as stock in trade. The assessee‟s contention in this regard has also been found correct. (ii) As regards broke .....

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s being disallowed in entirety. In the facts of the present case, what ought to have been considered for disallowance by the AO is broken period interest on securities lying unsold on 31st March and is reflected in closing stock, such security has to be valued after including the broken period interest. Broken period interest on such security will be allowed as a deduction only at the time of sale of these securities. These facts are totally at variance with cases cited by the assessee. In the p .....

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As regards disallowance on account of provision for depreciation on the investment is concerned, this aspect was referred only to point out that AO acted in a mechanical and perfunctory manner. If the securities are held as stock-in-trade which is the present case, there is no doubt in my mind that assessee is entitled for depreciation of investment which is nothing but difference in cost and market value at the end of financial year. The assessee is entitle to value stock-in-trade at cost or m .....

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the present case, we confirm the order of the CIT (A) deleting the addition made by the AO and dismiss the appeal of the Revenue. Consequently, the appeal of assessee on this issue for A.Y. 2009-10 in ITA No. 1276/Mum/2015 is allowed. 7. Since, the assessee s cross objection is supportive of the order of the CIT (A) on this issue for A.Y. 2008-09 and we have dismissed the Revenue s appeal by confirming the order of the CIT (A), the same has become infructuous and the same is dismissed as such. .....

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he hands of the assessee. For this he referred to the computation of income wherein, he has not make any claim of exempted income. He stated that once there is no exempted income u/s 10 (34) of the Act, Revenue cannot invoke the provisions of Section 14A of the Act. For this he relied on the decision of the Hon ble Delhi High Court rendered in the case of Cheminvest Ltd. Vs CIT 378 ITR 33 (Delhi) wherein it is held as under:- 23. In the context of the facts enumerated hereinbefore the Court answ .....

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